All-Pay Auction

What is an All-Pay Auction

An all-pay auction is an auction that requires all bidding participants pay their bid amount, regardless of whether they have placed the highest bid.

BREAKING DOWN All-Pay Auction

An all-pay auction game theory revolves around the idea of an auction where all participants are placing silent bids with the knowledge that they will be required to pay even if theirs isn’t the winning bid. It is common in these scenarios for bidders to overbid, or place offers that are higher than the intrinsic value of the item they are bidding on, in hopes of securing the winning bid. Many times, even the bidders who win the item are spending far more than the item is worth. In a standard auction, only the winning bidder would be required to make payment. All losing bidders would be free from financial obligation.

Several types of all-pay auctions exist; the most common form is a raffle. During a raffle, an object is placed up for bid. Each person pays to bid on the item, which in most cases involves buying a raffle ticket. Only one of the ticket holders, or bidders, will win the item.

Similarly, a lottery is another form of an all-pay auction since each person who purchases a lottery ticket is paying for a chance to win. However, unlike the standard all-pay auction, some lotteries award more than one winner.

What is an Absolute Auction

An absolute auction is a bidding process in which there is just one winner. The winner is the bidder who placed the highest bid on the item. There are no minimum bids or reserve prices on absolute auctions; in other words, there is no minimum amount due to proceed with the sale. This allows the opportunity for a bidder to walk away with an item that is worth far more than it cost them to secure.

There are several types of absolute auctions. The most common form is the one that takes place after a property has been foreclosed on. The bidder could potentially obtain a property for a much lower price than the property is worth.

However, there are potential risks involved in such transactions. Sometimes these properties come with hefty tax levies. There is also the possibility that these properties have sustained significant damage or require extensive repairs before being safe to occupy or resell. Additionally, many of these types of auctions take place sight-unseen, meaning that the bidder has not had a chance to examine the property for themselves.